Strong German CPI an excuse to buy EUR/USD?

[MongiIG]

The long EUR/USD trade has been bolstered by stronger than expected German consumer prices for March.

 Jeremy Naylor | Analyst, London | Publication date: Thursday 30 March 2023 

But, as IGTV’s Jeremy Naylor points out, while the numbers came in stronger than anticipated there’s evidence that USD weakness is pervading, giving traders an excuse to stay long for longer on both the euro and pound.

German CPI

One of the big news headlines that has broken today for the foreign exchange markets has been the eagerly awaited March reading of German consumer prices.

The number has eased significantly, but economists say there's no evidence that any long-term reduction can be achieved easily. You'll remember that we saw that big rise in energy costs this time last year in the wake of the Russian invasion of Ukraine. Well, since then, we've seen a big drop which has pulled down the annual figure.

In terms of the numbers for March in the German economy, we saw a 7.8% rise for the month. We had been looking for a drop from 9.3 to 7.4. So you can see we haven't gone as far as some economists had been expecting. And as a result of this, we've seen some interest in the euro over the US dollar.

EUR/USD

Let's take a look at the chart because I think it's worth looking at this in the context of what we've seen. These are ten minute candles. The vertical dotted line is the point at which the numbers were released.

You can see previously in the day, we've seen these moves up that we've got the currency trading at 10907, turning this into a daily candle just to get a better idea as to where we are. And you can see if we close at these levels, it will be the highest close that we've seen since the beginning of February. So we are very close to being at a two month high for the euro against the US dollar and you can see us, but at the moment there are really hardly any sellers at 10907.

Dollar basket

Now it's not all strong euro, it's weak US dollar. This is the dollar basket showing you here on the far right hand side, the drop that we've seen and we've got that pullback here. And you can see, of course with the euro/dollar trade, about 60% or 70% of the entire dollar basket, you can understand why this is falling, but it's not just against the euro that the dollar is falling.

GBP/USD

Look at sterling as well. Just to give you some context about this drop in the dollar, what it's doing to some of the other European currencies, sterling is up at levels not seen since the 2nd of February as well.

So rather than just the fact that it's an excuse to buy the euro because of the German inflation number, it's not just that, it is about dollar weakness, but nonetheless, as far as we've got the European Central Bank (ECB) with its foot fast on the pedal for interest rate rises, I think that is definitely going to be the story as we look forward from here and we'll have to see just how the ECB pivots ahead of its next meeting.

But certainly at the moment at least is looking to say the US Fed is ahead of the curve in terms of where it is, in terms of other central banks, and that it is taking its foot off and not likely to raise interest rates at anything like the lick that we've got for the European Central Bank.